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‘It makes sense for government to start spending again’ – Schüssler

Mike Schüssler from Economists.co.za on government’s adjusted lockdown Level 3 move.

NOMPU SIZIBA: Last night President Ramaphosa convened a meeting with the nation to address the issue of how the country deals with the growing number of cases of Coronavirus. The country remains on alert Level 3 of the lockdown, which includes alcohol sales remaining banned, and no social gatherings allowed – with the exception of funerals, of course, which must have a maximum of 50 attendees with social distancing.

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On top of the existing regulations, the government has moved to close some 20 land borders with South Africa – many of which are key to intra-Africa commerce – until the middle of February. The President also detailed plans around vaccinating some 67% of the population over the year.

Well, to get some perspective on his speech I’m joined on the line by Mike Schüssler, the chief economist at Economists.co.za. Thanks very much for joining us, Mike. There’s quite a bit to unpack, but I think one of the key changes announced last night was the issue of the closing of the 20 land borders, some of which are key from a commerce perspective. What were your thoughts in this regard, and does it get the balance right between saving lives and livelihoods? And is that even still a debate anyway?

MIKE SCHÜSSLER: It’s very difficult to always just criticise. But the point is, perhaps, with our closing our borders, we must remember that some of our industries have been going through tough times for a long period. For example, I know people who have hotels who haven’t had many guests for 10 months; they’re really struggling. And my feeling is, if you do things like close borders, close beaches, keep them closed, then you have to help those industries that will be impacted by it – for example, the restaurant industry, the gym industry, the hotel industry, catering and the like.

But, coming back to the borders, I think as long as we keep the freight open for now, and it’s a short-term thing, then I don’t think it’s going to have that much of a bigger impact. The main thing for me is that the Level 3 restrictions are on the curfew side, which is limiting business, it’s limiting, for example, airline flights, it’s limiting trains and buses, and also obviously the restaurants and those sorts of industries that still work at night. That’s a bigger issue overall, I think, and the same with the closures of places. I think they’ve got to have a way that they can take hotspots off the list again.

So if, for example, the Eastern Cape has come through the worst and you’ve seen the drop, then maybe you can take off the hotspots again and allow people back onto the beach, because I think it’s very important that people, first of all, get outside. Second of all, I think that economic activity can at least start getting some traction from the locals as quickly as possible. That’s the problem.

I can say one other thing. I’ve worked out now that these restrictions that we have at Level 3 – and I’ve gone through them – impact close to 1.4 million people. So, if I use 2019 data, because 2020 data isn’t that robust, that gives us an idea that there are still  a lot of people outside. If you take just the private sector outside of government and outside of domestic workers, that’s more than 10% of our working population that is in a very, very  deep dire-straits sort of situation, because now there is no longer a temporary employment-relief scheme. There’s no other scheme that’s helping. And those businesses have fixed costs like rents and pay, and it makes it very difficult.

So one can say yes, but the restaurants are open. I say, yes, but 40% of their income or profit comes from selling liquor, and many restaurants actually do better late at night than early in the evening. So, when they have to close at eight o’clock it sort of depresses the whole industry. It’s not just about restaurants, it’s just what things are right now. I think we’ve got to find a way, once a hotspot is over, to clear it out and maybe find other ways to implement the curfew for fewer hours, because right now it’s eight hours of curfew. If we make it six hours of curfew, will it still have the same impact? I think so. It will allow certain industries to operate at a better level.

NOMPU SIZIBA: Yes. It’s a very tricky situation, of course, because we do see that the infections are rising terribly, as well as the deaths. But there’s always this balancing act that needs to be reached. I think one of the key things that you touched on is government support. In all the other jurisdictions where we see that there’ve been strict lockdowns and so on, government and the monetary side of things kick in to try and help those people who’ve been directly affected. But the problem for South Africa, of course, is that we’re broke.

MIKE SCHÜSSLER: Yes, we are broke. But there’s another thing – when you’re broke, you have to be very clever with your finances. And if you want businesses to survive, particularly businesses that have now been in a form of restricted trading for 10 months, then you have to really start thinking that these guys are about to fall over. You’re not giving anything more to them. And, if they do fall over we know, for example, the industries that are impacted at the moment pay on average R7 billion a month in taxes. If they are going to fall over, you’re going to lose that R7 billion anyway. If you then give them the R7 billion to help pay their fixed costs, or at least part [of them] monthly to help pay the rent, help pay the insurance, help pay the utility bills, the interest on their building, that’s important.

And I think if you then work it out, once the excise duties that you collect from them, the company taxes and the Vat, you may pay out for three or four months but then you are more likely to get that money back in the next year, and it will help cover. But if the industry drops, then you’ve got that hole…

NOMPU SIZIBA:  When they come back.

MIKE SCHÜSSLER: The same with the workers. We have to find a way, because that’s R9.6 billion in the formal sector – excluding the informal sector – that the impacted workers are potentially losing. But if you could get the Ters to pay them, say, at least R1.5 billion a month, it will make a big difference to people who have no income. Right now, for example, you can’t operate a nightclub because of the curfew. And many of the people in an airline are doing fewer hours because flights can operate only at 60 or 70% – and then they are still not quite full. So we have to find ways to do this. Every major country in the world has helped. Yes, Zimbabwe hasn’t helped, but Zimbabwe has really much less than we do. But countries like Mexico, countries like Germany, paid the fixed rent, the fixed costs of businesses. And I think that’s very important at least to tide them over, especially when you’ve done it this long.

NOMPU SIZIBA: You’ve got to look at the long-term picture. Now, we heard today that the chairman of the Ministerial Advisory Committee on Covid-19, Professor Salim Abdul Carim, took responsibility and has lamented that South Africa didn’t move quickly in investigating vaccine-manufacturing capacity here in South Africa. He said we should have been doing that as far back as July. Now we’re furiously trying to secure what we can, which is going to mean mass importation and this is going to cost money because we’re going to have to pay foreign currency for these drugs. Are there any concerns on your side that the government, given that it is broke, is going to have quite a hard time to fund these vaccines? We see that it’s trying to partner with the private sector, in the form of [getting] medical aids to help as well.

MIKE SCHÜSSLER: Look, we’ve got to get those vaccines rolling out as quickly as possible. Once you’ve got the vaccine, your economy can open up fully and it will take the fear factor away from people and you’ll start collecting money. If you don’t roll out the vaccines, then the economy doesn’t get going and you lose more than the money that you’re going to spend on the vaccine. So it’s a very tricky situation.

And it’s the same with trying to save some of the businesses. Right now, I think the first thing that we should be doing is looking at getting the vaccine as quickly as possible, and as much as possible rolled out. If you can give it to the healthcare workers, for example, and the older, fragile people, you can bring down the death rate quite substantially, and that would clear your hospitals, where you’d be saving money – from the hospital spend to a large extent, not maybe a hundred percent – and it would also help you get your economy going.

At the other end, if you start helping some businesses out in some labour costs, they would also spend. You’d get some of that money back right away in the form of Vat and the like. But you would also have businesses that can quite easily survive without getting into trouble. And if you don’t do that, especially [for] the longer-term closures or restrictive businesses, you run the risk of bank defaults because the loans start coming down as well. And that has other impacts in the sense that the rating agencies would look at that, your growth declines, your banks look a bit more risky, and your cost of capital goes up again– and all those things are against you. So it makes sense for government to start spending again, especially when there’s a lockdown.

I don’t like a high deficit, but we have no choice. The cost of not doing it is at least equal, if not more, than doing it, but the suffering will be far, far less. And the survival rate will be better.

So that’s the way I’m thinking. I don’t think it’s a magic cure-all. I really don’t think so. I think we will be in trouble for years to come, but we will be in trouble for years to come, anyway.

NOMPU SIZIBA: Mike, we thought last year was a real miserable year but, given what we see before us in terms of the health and the economic crisis that we’re faced with now, and the fact that rolling out vaccines is going to take quite some time, what is your prognosis now about South Africa’s key metrics, especially GDP – and of course the job situation?

MIKE SCHÜSSLER: Well, it’s very difficult. The first thing is I’ve looked at this, and I don’t know – I’m not a medical forecaster – but let’s assume, if I may, that we’re going to be in a form of restrictions until at least February 15, that tells me that the first-quarter GDP is going to be negative. We should have a pretty good bounce back, but it will be in the second quarter, if that is the case. But it will mean that this year’s growth is not going to be between 3.5% and 4.5%, which most economists and government were hoping for. We’re then looking at probably around half that, where we’re going to be at 1.8%, say, to 2.5% growth. That worries me, because if I then look at the population growth, we run the risk of again staying a lot poorer, and it makes for further downgrades. Maybe not right away – we do have a little bit of leeway – but I think by just after the budget of next year, 2022, we could have another round of downgrades. And that will make it very, very difficult for us to get out of the negative or junk stages. It will take us at least a decade then. And, under those circumstances, the cost of capital for a savings-poor country like South Africa will remain very, very high.

So my forecast at the moment is that we are looking at a higher inflation rate due to commodity prices, partly but not that much out of sync because medical Aids are not increasing, and so on. That’s also a positive. But I think overall reasonably higher inflation rates at, say, 4 or 4.5%. We’re looking at GDP growth of, say, 2.5%. I think we’ll do better this year than last year. Obviously if we don’t get the vaccine rollout and we go for a third wave, and we have to close down parts of the economy again, and we have to go into tighter restriction, then all bets are off. And we again run the risk of going negative.

However, if we do get everything sorted by the February 15, we roll out the vaccine quicker than expected – say have 10% of the population covered by the middle of the second quarter or something like that, and by some miracle we do that – then maybe not quite 4.5%, but 3.5% GDP growth comes back into the equation for me. And, once we get the vaccine, I’m sure consumer confidence will go up. I don’t know how we’re going to measure the changes, because we are so low, but I think that helps, and it helps business confidence. And it will improve the relationship that government has with business and its population if we can do the more positive thing.

If we don’t get it going, then I think it starts impacting on next year’s growth, even, as people lose confidence.

NOMPU SIZIBA: That was Mike Schüssler, the chief economist at Economists.co.za.

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Spending or wasting?

Govt should learn to make do with HALF of the revenue. Easy. Just cut out all misappropriated funds, corruption & wasteful and fruitless expenses.

(But then, thousands of connected elite of the ruling Thug-party, will be without income..)

That’s been the plan in every budget speech in the last 5 years .

We will just cut the corruption and save all that money. Problem is that we haven’t been very successful at It and it’s time for plan B.

Wasteful expenditure and corruption often tend to be one-off events. It would be far better to permanently reduce the burden on the taxpayer by retrenching 30% of the public alleged service, and cutting the rest’s salaries by 20%. That would be a permanent, long-term saving.

Haven’t we run out of loaned stolen money.

If money is to be spent then give it to legitimate poor south african citizens to spend.

The only things this government spends money on is for self enrichment, parties and KFC.

…and Nandos! (All those municipal ‘meetings/indunas/imbizos/lekgotlas…”)

Many government workers have used the one week on – one week off schedule as an excuse to work half the time.

Cut all government salaries by 30% and use that money for those without income.

Spending??? Really Mike?

Increase in Government Expenditures –> inflationary increases.

Its not like the Government spends on productive activities.
If they did, I would agree with you. But they dont.

Interesting that Government would listen to these crappy Economists.

Its time we have hard core mathematical economists run this country!

We don’t need a mathematical leader.
We just need an Honest Person to do an Honest Job, it is just that simple.

I do agree with you, economists believe that MMT (Modern Monetary Theory) and Keynesian Economics can spend us out of the problem. This is causing massive short term Booms and Busts.

We have Janet Yellen going from Fed Governor to Treasury Secretary, which will bring about more money printing, note that 20% of all US$ got printed last year. Problem is that people are saving less because they are behaving like the government, this idea that their is 2 types of money that being Government Money and Public money is an age old excuse to continue printing money and reducing its value.

The separation from Banks and Government/Politicians is a critical and necessary step in creating a Sound Money System and would stop Expropriation Through Inflation.

If they really must spend (money we dont have, money we no longer can borrow) then spend on repairing roads and infrastructure, AND NOT at 4 times the original budgeted cost.

Still waiting to see Tito’s R 160 billion in salary savings.

“….hard core economists to run this country” (?)

The USA tried that, a businessman as president…and America got “Trumped”…

End of comments.

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